How does green credit policy affect polluting firms' dividend policy? The China experience

We explore how polluting firms alter their dividend policy in response to pressure from green credit policy. The green credit guidelines that China adopted in 2012 aim to promote credit supply in sustainable development. Meanwhile, this green credit policy forced polluting firms to access restricted credit supply and tightened bank monitoring. Using the adoption of the green credit policy as a quasi-natural experiment, we find that polluting firms tend to lower their dividend payments, consistent with the view that dividends act as an effective tool of liquidity management and a substitute to mitigate agency problems. This finding is more pronounced among firms with weaker corporate governance, greater financial constraints, and more green innovation output. Our further analysis suggests that the green credit policy forces polluting firms to engage in less dividend smoothing.